HW # T: PROBLEM SET Tariffs, Quotas, and Strategic Trade Policy Consider a country\":r with the following demand and supplv functions for a commod itv: 1} 2} 3} 4} 5} Demand: Q = int} P Supplv: Q = 1n + [LSP Autarfry: Compute the equilihnum price and quantity for this market in autarlqr. Draw a graph. Compute total consumer surplus and producer surplus. Free Trade: Let the world free trade price he Pvr 2 3t}. Draw a graph. Compute domestic consumption, production, and imports. Compute the consumer gain, the producer loss, and the net welfare gain due to free trade. Tariff (small country}: Let the domestic government enact a tariff equal to $10 (T = 1(1). Assume that the world price is $3, (Pu.- = 33}. Draw a graph. Now compute the new levels of domestic consumption, production, and imports. Compute also, the loss of consumer surplus, the gain of producer surplus, the consumption and production distortion losses, and government revenues. Is there a net gain or loss? Import Quota (small country]: Instead of a tariff, now let the government enact an import quota equal to 15. {imports = Im = 15}. Draw a graph. Now compute the new equilibrium price and the levels of domestic consumption, production, and imports. Compute also, the loss of consumer surplus, the gain of producer surplus, the consumption and production distortion losses, and government revenues. 1Il'tfhat is the rent collected by foreign exporters? Export Subsidy {small country}: Let the domestic government enact an export suhsidvr equal to $5 {T = 5]. Assume that the world price is t), (Pm 2 Hi}. Draw a graph. Now compute the new levels of domestic consumption, production, and imports. Compute also, the loss of consumer surplus, the gain of producer surplus, the consumption and production distortion losses, and government subsidies. Is there a net gain or loss? 6) Game Theory: Strategic Trade Policy (The Brander-Spencer Model) Assumptions: Two players, 'Airbus' and 'Boeing' (a one-shot game (no repeated game)) Two strategies: 'Produce' or Not Produce' a new 250 seat aircraft Boeing plays first, Airbus plays second Payoffs as in the Payoff Matrix are profits in millions of dollars. Payoff Matrix Airbus Produce Not Produce Boeing -5 O Produce -5 100 100 0 Not Produce 0 0 a) Given that Boeing is the first player, what is the outcome of the game? Why? b) Now let the sponsoring European governments give a $10 million subsidy to Airbus to design and produce the aircraft. Now what is the outcome of the game? Why? c) What do these results mean for strategic trade policy? Why